CHICAGO & SANTIAGO, Chile--(BUSINESS WIRE)--Fitch Ratings has affirmed its ratings on Corporacion Nacional del Cobre (Codelco), including the company's Issuer Default Rating (IDR) of 'A+'. The full list of ratings follows below.
The affirmation reflects the company's 100% ownership by the Government of Chile and its strategic importance to the country. As part of its mandate, the company contributes significantly to the state's revenues. Codelco's combined dividends and taxes paid to the Chilean government amounted to 15% of general government revenue and 4% of GDP on average for the last five years. In 2010, Codelco's net revenue of USD16.1 billion accounted for 8% of Chile's GDP and 32% of general government revenues, and EBITDA of USD7.5 billion accounted for 4% of GDP and 15% of general government revenues.
Codelco recently announced its intention to exercise its call option to purchase 49% of Anglo American Sur, an asset currently owned 100% by Anglo American plc. In a second step, Codelco will likely sell half of this stake to Mitsui, ultimately leaving it with 24.5% of Anglo American Sur. The final cost for this 24.5% stake in Anglo American Sur is estimated to be about USD1.9 billion, which will be funded by a term loan from Mitsui. The debt associated with this acquisition should be serviced by cash flow from its share in Anglo American Sur.
Codelco possesses immense copper deposits, accounting for 10% of the world's known reserves, and holds a leading global position in the copper mining industry, accounting for 11% of the world's annual copper output with 1.7 million metric tons of its own production during 2010.
Fitch views Codelco's long-life reserves as a strategic asset for Chile, because it should allow the company to remain an important contributor to government revenues in the future. Should the need ever arise due to the deterioration in the fundamentals of the copper industry, Fitch would expect to see forthcoming financial support from the government in the form of lower dividends.
Notwithstanding its 100% government ownership, Codelco also benefits from a strong standalone investment grade credit profile. In addition, the company profits from its low cost position. Codelco's cash cost of production including by-products for the first half of 2011 was USD1.05 per pound, a slight improvement on USD1.06 per pound during the first half of 2010, mainly as a result of higher average prices.
Codelco's financial performance is strong for the LTM to June 30, 2011, with over USD17.8 billion of revenues. However, the high LTM EBITDA of USD8.9 billion is subject to large tax obligations, resulting in CFFO of only USD3.2 billion for the period. EBITDA for the first six months of 2011 was solid at USD4.7 billion, a 54% improvement on USD3.1 billion during the first half of 2010.
This improvement in Codelco's top line financial performance reflects a period of high copper prices during the first half of 2011 of around USD4.26 per lb on average compared to USD3.42 on average for 2010. Fitch expects revenues for Codelco in the region of USD15 billion for 2011, with EBITDA generation around USD7 billion as a result of strong sales volumes and high prices for both copper and molybdenum during the first half of the year. The company's CFFO is expected at around USD5 billion compared to USD3 billion in 2010, respectively.
In 2010, Codelco had a negative FCF of USD1.3 billion from CFFO of USD3.3 billion as a result of dividends paid to the government amounting to USD2.2 billion and capex of USD2.3 billion. To bolster its liquidity, Codelco issued USD1 billion 3.75% notes due 2020 in October 2010. Proceeds from this issuance will be used to fund capex and for general corporate purposes.
Capital expenditures as of June 30, 2011 were at USD2.6 billion. Fitch envisages capex in to remain under USD3 billion by the end of 2011 due to the delay in some expenses. Codelco's ambitious capex program is expected to average around USD3.5 billion per year from 2011-2015 and USD2.5 billion per year from 2016-2020. These investments are critical to maintaining the reserves and capacity levels of Codelco. The investments are expected to maintain volumes around 2 million metric tons per year. Codelco's average copper sales volume over the last five years (2006-2010) was 1.97 million metric tons.
Funding for these investments will be met from a combination of internal cash flow, domestic and international bank debt, and the domestic and international capital markets. The amount of internal cash to be used for these projects is subject to the Chilean Treasury regarding the percentage of net income to be paid annually to the government by Codelco, usually at 100%. Retained earnings are subject to approval each year by the Ministries of Mining and Finance. Fitch believes the domestic and international markets will remain open and receptive to Codelco due to its 100% government ownership and low cost position as the world's largest copper producer.
Codelco has low leverage and strong cash flows before dividends. As of June 30, 2011 the company had USD8.3 billion of debt with USD1.7 billion due in the short term. Codelco's total debt to LTM EBITDA ratio for the same period was 0.9 times (x), and net debt to EBITDA ratio was 0.8x. Leverage is expected to remain low and consistent with the rating category, as reflected by Fitch's projected net debt/EBITDA ratio of around 1.0x and FFO adjusted net leverage ratio of 1.9x for the year.
Due to the nature of Codelco's government ownership, the company historically held an adequate cash and marketable securities balance in relation to its short-term debt. As of June 30, 2011 cash and marketable securities was USD1.4 billion with short-term debt at USD1.7 billion.
For 2010, the company's liquidity position was sufficient with Cash + Marketable Securities + CFFO to short-term debt coverage at 2.2x. This ratio improved to 2.7x as of the LTM to June 30, 2011. In 2009, a capital injection of USD1 billion was made to Codelco by the Treasury and the proceeds are expected to be used up to 2015, indicating historical instances of governmental support when required.
Operational and financial challenges to the company going forward mainly relate to its ambitious capital expenditure plans to 2020. The capex plan relates to maintaining and increasing on current volume output levels and improving average ore grades. Other systemic risks exist in the fundamentals of copper and molybdenum demand, with copper prices recently decreasing to around USD3.27 from over USD4 during the first half of the year.
Fitch affirms Codelco's ratings as follows:
--Foreign currency IDR at 'A+';
--Local currency IDR at 'AA-';
--US$435 million 6.375% notes due Nov. 30, 2012 at 'A+';
--US$500 million 5.5% notes due Oct. 15, 2013 at 'A+';
--US$500 million 4.75% notes due Oct. 15, 2014 at 'A+';
--US$500 million 5.625% notes due Sept. 21, 2035 at 'A+';
--US$500 million 6.15% notes due Oct. 24, 2036 at 'A+';
--US$600 million 7.5% notes due Jan. 15, 2019 at 'A+';
--US$1 billion 3.75% notes due Nov. 2020 at 'A+'.
--National scale rating at 'AAA(cl)';
--UF7 million 4% notes due Sept. 01, 2012 at 'AAA(cl)';
--UF6.9 million 3.29% notes due April 1, 2025 at 'AAA(cl)';
--UF11 million Undrawn Line Program No. 608 at 'AAA(cl)'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The issuer did not participate in the rating process other than through the medium of its public disclosure. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--Corporate Rating Methodology, Aug. 12, 2011;
--Parent and Subsidiary Rating Linkage, Aug. 12, 2011;
--National Ratings Criteria, Jan. 19, 2011;
--Evaluating Corporate Governance, Dec. 16, 2010.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
Evaluating Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=581405
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